The price is right…

Posted in AT&T, DISH, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 11:42 am by timfarrar

As the FCC’s incentive auction draws to a close, some further clues emerged about the bidding when the FCC split licenses between reserved and unreserved spectrum. What stood out was that in Los Angeles, San Diego and another 10 smaller licenses (incidentally all located in the southwestern US), only 1 license is classified as reserved. That means there is only 1 bidder that has designated itself as reserve-eligible when bidding for these licenses and that bidder only wants a single 5x5MHz block of spectrum. In contrast, in LA there are five 5x5MHz blocks going to non-reserved bidders (and 1 block spare).

This leads me to believe that T-Mobile may not be holding quite as much spectrum as anticipated, at least in that part of the country, while some potentially reserve-eligible bidders (i.e. entities other than Verizon and AT&T) have not designated themselves as reserve-eligible. That election can be made on a PEA-by-PEA basis, but it would be very odd for a major bidder like Comcast not to designate itself as reserve-eligible. On the other hand, speculators whose intention is to sell their spectrum to Verizon or AT&T, very likely would not want to be reserve-eligible, since that could cause additional problems in a future sale transaction.

A plausible conclusion is that if T-Mobile’s bidding is more constrained, then Comcast may be bidding more aggressively than expected, but is primarily focused on areas where it already has cable infrastructure (i.e. not Los Angeles, San Diego, etc.), and T-Mobile, AT&T and Comcast may all end up with an average of roughly 10x10MHz of spectrum on a near-national basis. We already know that one or more speculators are bidding aggressively, due to the gap between gross and net bids (note that the FCC reports this gap without regard to the $150M cap on DE discounts so it could be a single aggressive player with $2B+ in exposure) and thus the balance of the 70MHz of spectrum being sold would then be held by other players (but with these holdings likely skewed towards more saleable larger markets, including Los Angeles).

Its interesting to note that speculation is now revving up about the transactions to come after the auction is complete, with most attention focused on whether Verizon is serious about a bid for Charter, or if this is a head fake to bring DISH to the table for a spectrum-focused deal, after Verizon apparently sat out the incentive auction. Incidentally, Verizon’s expressed interest in Charter would also tend to support the notion that Verizon believes Comcast may want to play a bigger role in the wireless market, by acquiring a significant amount of spectrum in the incentive auction and perhaps even buying a wireless operator at a later date.

However, when you look at Sprint’s recent spectrum sale-leaseback deal, which was widely highlighted for the extraordinarily high valuation that it put on the 2.5GHz spectrum band, Verizon’s need for a near term spectrum transaction is far from compelling. I’m told that the appraisal analysis estimated the cost of new cellsites that Verizon would need to build with and without additional 2.5GHz spectrum, but that either way, there is no need for Verizon to engage in an effort to add substantial numbers of macrocells until 2020 or beyond, given its current spectrum holdings and the efficiency benefits accruing from the latest LTE technology. And if mmWave spectrum and massive MIMO are successful, then Verizon’s need for spectrum declines considerably.

So it seems there is little reason for Verizon to cave now, and pay Ergen’s (presumably high) asking price, when it does not need to start building until after the March 2020 buildout deadline for DISH’s AWS-4 licenses. It would not be a surprise if Verizon were willing to pay the same price as is achieved in the incentive auction (i.e. less than $1/MHzPOP), but the question is whether Ergen will be prepared to accept that.

Of course, DISH bulls suggest that the FCC will be happy to simply extend this deadline indefinitely, even if DISH makes little or no effort to offer a commercial service before 2020. The most important data point on that issue will come in early March 2017, when DISH passes its initial 4 year buildout deadline without making any effort to build out a network. Will the FCC take this opportunity to highlight the need for a large scale buildout that DISH promised in 2012 and the FCC noted in its AWS-4 order? Certainly that would appear to be good politics at this point in time.

“…we observe that the incumbent 2 GHz MSS licensees generally support our seven year end-of-term build-out benchmark and have committed to “aggressively build-out a broadband network” if they receives terrestrial authority to operate in the AWS-4 band. We expect this commitment to be met and, to ensure that it is, adopt performance requirements and associated penalties for failure to build-out, specifically designed to result in the spectrum being put to use for the benefit of the public interest.”

“In the event a licensee fails to meet the AWS-4 Final Build-out Requirement in any EA, we adopt the proposal in the AWS-4 NPRM that the licensee’s terrestrial authority for each such area shall terminate automatically without Commission action…We believe these penalties are necessary to ensure that licensees utilize the spectrum in the public interest. As explained above, the Nation needs additional spectrum supply. Failure by licensees to meet the build-out requirements would not address this need.”


What’s Charlie’s game now?

Posted in AT&T, DISH, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 3:44 pm by timfarrar

Back in November 2014, I published my analysis of what was happening in the AWS-3 spectrum auction to scorn from other analysts, who apparently couldn’t believe that Charlie Ergen would bid through multiple entities to push up the price of paired spectrum. Now we’re seeing relatively little speculation about who is doing what in the incentive auction (other than an apparently mystifying consensus that it will take until at least the end of September to complete Stage 1), so I thought it would be useful to give my views about what is happening.

The most important factor to observe in analyzing the auction is that overall demand relative to the amount of spectrum available (calculated as first round bidding units placed divided by total available supply measured in bidding units) has been considerably lower than in previous large auctions (AWS-1, 700MHz) and far short of the aggressive bidding seen in the AWS-3 auction.

That’s attributable partly to the absence of Social Capital, but much more to the 100MHz of spectrum on offer, compared to the likelihood that of the five remaining potential national bidders (Verizon, AT&T, T-Mobile, DISH and Comcast), none of them are likely to need more than about 30MHz on a national basis.

What’s become clear so far over the course of the auction is that most license areas (Partial Economic Areas) are not attracting much excess demand, apart from the top PEAs (namely New York, Los Angeles and Chicago) in the first few rounds. I said before the auction that DISH’s best strategy would probably be to bid for a large amount of spectrum in a handful of top markets, in order to drive up the price, and that appears to be exactly what happened.

However, it now appears we are very close to reaching the end of Stage 1, after excess eligibility dropped dramatically (by ~44% in terms of bidding units) in Round 24. In fact a bidder dropped 2 blocks in New York and 3 blocks in Los Angeles, without moving this eligibility elsewhere, somewhat similar to what happened on Friday, when one or more bidders dropped 5 blocks in Chicago, 3 blocks in New York and 1 block in Los Angeles during Round 20.

However, a key difference is that a significant fraction of the bidding eligibility that moved out of NY/LA/Chicago during Round 20, ended up being reallocated to other second and third tier markets, whereas in Round 24, total eligibility dropped by more than the reduction in eligibility in New York and Los Angeles. It is natural that a bidder such as T-Mobile (or Comcast) would want licenses elsewhere in the country if the top markets became too expensive, whereas if DISH’s objective is simply to push up the price, then DISH wouldn’t necessarily want to bid elsewhere and end up owning second and third tier markets.

This suggests that DISH has been reducing its exposure in the top three markets, in order to prevent itself from becoming stranded with too much exposure there. My guess is that DISH exited completely from Chicago in Round 20 and is now reducing exposure in New York and Los Angeles after bidding initially for a full complement of licenses there (i.e. 10 blocks in New York and Chicago and 5 blocks in Los Angeles).

If DISH is now down to about 8 blocks in New York and only 2 blocks in Los Angeles, then its maximum current exposure (if all other bidders dropped out) would be $4.52B, keeping DISH’s exposure under what is probably a roughly $5B budget. Of course DISH could potentially drop out of Los Angeles completely and let others fight it out (for the limited allocation of 5 blocks), if its objective is simply to maximize the end price, but this may not be possible in New York, because there are 10 license blocks available, which could give Verizon, AT&T, T-Mobile and Comcast enough to share between them.

Regardless, with the price increasing by 10% in each round, the price per MHzPOP in New York and Los Angeles would exceed that in the AWS-3 auction before the end of this week, implying that a resolution has to be reached very soon. If DISH is the one to exit, then it looks like Ergen will not be reallocating eligibility elsewhere, and DISH’s current eligibility (256,000 bidding units if it is bidding on 8 blocks in New York and 2 in Los Angeles) is likely higher than the excess eligibility total of all the remaining bidders combined (~182,000 bidding units at the end of Round 24 if all the available licenses were sold). This implies that a rapid end to Stage 1 of the auction is now likely, perhaps even this week and almost certainly before the end of next week, with total proceeds in the region of $30B.

Of course we will then need to go back to the next round of the reverse auction, but it looks plausible that convergence may be achieved at roughly $35B-$40B, potentially with as much as 80-90MHz sold (i.e. an average price of ~$1.50/MHzPOP). If DISH is forced out in Stage 1, then prices in key markets would probably not go much higher in future rounds of the forward auction, so the main question will be how quickly the reverse auction payments decline and whether this takes 1, 2 or 3 more rounds.

Also, based on the bidding patterns to date, it seems likely that Comcast may well emerge from the auction with a significant national footprint of roughly 20MHz of spectrum, potentially spending $7B-$10B. In addition, unless the forward auction drops to only 70MHz being sold, all four national bidders could largely achieve their goals, spending fairly similar amounts except in New York and Los Angeles, where one or two of these players are likely to miss out. In those circumstances, it will be interesting to see who would feel the need to pay Ergen’s asking price of at least $1.50/MHzPOP (and quite possibly a lot more) for his AWS-3 and AWS-4 spectrum licenses.

UPDATE (8/30): Bidding levels in New York and Los Angeles dropped dramatically in Round 25 (to 10 and 8 blocks respectively), with total bidding units placed (2.096M) now below the supply of licenses (2.177M) in Stage 1. This very likely means that DISH has given up and Stage 1 will close this week at an even lower price of ~$25B, with convergence of the forward and reverse auction values probably not achieved until the $30B-$35B range. This lower level of bidding activity increases the probability that 4 stages will now be required, with only 70MHz being sold in the forward auction at the end of the day.


Charlie’s angles…

Posted in DISH, Operators, Regulatory, Spectrum, Sprint, T-Mobile at 4:08 pm by timfarrar

It feels like an age since Ergen’s plan for fixed wireless broadband and hosted small cell deployment on rooftop satellite TV antennas was at the core of his bids for Sprint and Clearwire in 2013. And as I pointed out last year, the AT&T acquisition of DirecTV seemed to pre-empt DISH’s plan and threaten more competition if DISH did proceed with a rollout.

Now the prospects of DISH reaching agreement with T-Mobile seem as distant as ever, and Verizon and AT&T appears eager to dismiss any prospect of them buying DISH’s spectrum. In addition, DISH’s stock has fallen after the FCC ruled against it last week over the Designated Entity discounts in the AWS-3 auction and Ergen has hinted that as a result he might now seek to dispose of his spectrum rather than entering the wireless market.

However, in recent weeks, Sprint has been playing up its small cell plan, but has not yet named its partners, except to hint that it will look towards off-balance sheet financing for the buildout. So I wonder if Charlie’s next angle to put his spectrum to use could be through a partnership with Sprint to make use of DISH’s rooftop sites in the small cell buildout, and perhaps host some of DISH’s spectrum at the same time. After all, the time when Ergen claims he is definitely leaning one way is usually the point at which he moves decisively in the opposite direction.

Such a deal could include an exchange of equity, with Softbank investing in DISH and DISH investing in Sprint. That would be a logical explanation for Softbank’s otherwise incomprehensible recent moves to buy additional Sprint equity in the public markets, rather than injecting much needed incremental cash into Sprint.

DISH could even participate in the network equipment leasing company (perhaps reframed as a JV) if it can use the cellsites for its own fixed wireless broadband (and perhaps mobile broadband) offerings. And none of this would prevent DISH from entering into a spinoff of its spectrum holdings, perhaps even with Sprint agreeing to act as an anchor tenant, leasing spectrum such as the PCS H-block and the adjacent AWS-4 uplink, which could be repurposed as a supplementary downlink and might provide Sprint with an alternative to bidding in the incentive auction next year.

A spectrum spinoff (or other transaction) by DISH still seems a likely outcome, and the FCC appears to have helped DISH on its way, by stating it will accept an “an irrevocable, standby letter of credit” instead of immediate payment, which will only be drawn if DISH has failed to make the $3.3B repayment of the DE discount by 120 days after the release of the Order (i.e. mid December), instead of the 30 days available to make a cash payment. That concession (which doesn’t have any obvious precedents that I’m aware of) will save DISH 90 days interest (over $40M at a 5% interest rate) and gives Ergen much more time to sort out a deal to reorganize his spectrum interests.

It feels like DISH will now finally have to pull the trigger on something, though I’m surprised no analysts appear to have even contemplated the scenario I’ve described above. The current uncertainty in the financial markets may not be helpful to the prospects of a deal being reached, especially if it proves difficult to get financing for a spectrum spinoff. Nevertheless, that need not prevent a small cell hosting deal, and with Charlie you simply have to expect him to have an angle most people haven’t thought of.


Sorry Charlie…

Posted in AT&T, DISH, Operators, Spectrum, T-Mobile, Verizon at 4:25 pm by timfarrar

Two people have now told me that with 99% certainty, the leak about the DISH/T-Mobile talks came from T-Mobile itself, not from DISH, based on the authorship of the WSJ report. Although it might be tempting to conclude that T-Mobile is trying to prompt a cable operator to consider an alternative bid, Charter has indicated that it will focus on TWC’s MVNO agreement with Verizon to provide wireless services if its TWC bid is successful and Comcast could presumably do likewise if desired.

Moreover, it seems this was not some sort of “official” leak, but instead simply reflects general conversations which got blown out of proportion, because Bloomberg has reported that the talks, which have been going on since last summer, have not advanced significantly in recent weeks.

That still leaves the perplexing analyst event that DISH held on Tuesday, and there’s been no convincing explanation of why that event was scheduled at short notice. Nevertheless, there’s now a frenzy of speculation leaving some convinced about the “inevitability” of a merger. What none of the reports deal with at all is how T-Mobile would actually make use of DISH’s spectrum without AWS-3/4 interoperability, and even then half of DISH’s spectrum in PCS H-block and 2000-2020MHz would still have no ecosystem available.

Instead analysts simply assume that interoperability doesn’t even need to be considered, and that the FCC “buildout requirements of its spectrum are so far in the future it’s not even worth starting the discussion about the weak enforceability of those deadlines.”

Of course a merger makes all the sense in the world if you assume DISH’s spectrum is just as usable as any other spectrum and that the FCC won’t enforce its buildout deadlines (in March 2020) so DISH has all the time in the world to strike a deal at a full price. Unfortunately that simply isn’t the case, and both Verizon and AT&T know that only too well.


Can you hear me now?

Posted in DISH, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 8:07 pm by timfarrar

That’s seems to be the question Charlie Ergen is asking Verizon, with the leak of merger talks between DISH and T-Mobile to the Wall St Journal. Yesterday DISH held an analyst meeting at which nothing much of consequence was said, raising the question of precisely why DISH held that analyst meeting in the first place.

The logical conclusion is that DISH hoped it would be able to announce some sort of deal yesterday, but that wasn’t achieved, and so now there has been a decision to leak more specific details about the progress of the DISH/T-Mobile talks (which have been rumored for months). The details disclosed make it unlikely that the intent is to bring T-Mobile back to the table, given the statement that talks on valuation remain at a “formative stage”. If the leak came from the T-Mobile side then its plausible to imagine that the aim is to pressure a cable company to make a bid for T-Mobile, or simply that the WSJ made a mountain out of a molehill, given others are saying there has been no change in the situation in recent weeks.

However, (until now) I considered it more likely that DISH is sending a message to Verizon, after the breakdown of talks on a spectrum sale or leasing deal, that Ergen has other alternatives he can pursue. Its previously been reported that Verizon rejected DISH’s asking price of $1.50 per MHzPOP for the AWS-4 spectrum last summer, and even after the AWS-3 auction, I very much doubt Verizon has shifted its position on valuation significantly. For spectrum without an ecosystem like AWS-4, I would still not expect Verizon to be willing to pay much more than $1 per MHzPOP.

Nevertheless, if Verizon had been willing to commit to a partial lease of DISH’s AWS-4 spectrum and support interoperability into the bargain (perhaps with some AWS-3 licenses included to raise the average reported price), then that would have helped DISH to undertake a spectrum spinoff. By doing a deal now, I would expect DISH to also have been able to seek a compromise with the FCC by agreeing to repay the $3.3B DE discount it received in the AWS-3 auction, and thereby mitigate the bad feeling which would otherwise be likely to hamstring DISH’s ability to get help from the FCC in ensuring AWS-3/4 interoperability in the future.

So if Verizon has truly walked away for good, and cannot be forced back to the table by this leak, then I think this is unalloyed bad news for DISH. Without interoperability it is hard to see the value of DISH’s AWS-3 spectrum for T-Mobile, as I noted last week. And it is equally hard to see how agreement can be reached with Deutsche Telekom on the respective valuations of DISH and T-Mobile, especially when DT can hold out for a potential merger with a cable company in the future. So I think Verizon can still proclaim that when it comes to DISH’s spectrum, it’s heads we win, tails you lose.